Category: Newsletters

In Brief

• Available to companies that invest in Carbon Capture projects. 
• Base Credit is $17 per ton based on geologically sequestered carbon oxide  
• Credit amount is increased 2 times per ton using DAC 
• Using prevailing wage and apprenticeship requirements further increases the Credit 5 times per ton. 
• Claimed for 12 years starting when the equipment placed in service. 

Companies involved with carbon sequestration have an opportunity for a new tax credit– commonly called 45Q referring to the code section. It incentives companies to receive tax benefits by making further investments in carbon capture, utilization, and storage.

45Q allows companies to receive tax credit for each metric ton of qualified carbon oxide (QCO) captured using carbon capture equipment, which could either be disposed of in a secure geological storage or used as a tertiary injection in certain oil or natural gas recovery projects.

A company can claim 45Q for a 12-year period beginning when the carbon capture equipment is originally placed in service.

Do You Qualify? 

This credit is available to companies that invest in carbon capture, utilization, and storage (CCUS) projects. CCUS is a technology that captures carbon dioxide (CO2) from industrial processes and other sources, such as power plants, and stores it underground or uses it for other purposes.   

How is the credit calculated? 

45Q revolves around the production of gases and is based on the capturing of CO2. So, weight and storage capacity are factors that contribute to how much credit a company will generate. For Carbon Oxide that is disposed of in a secure storage, the applicable credit is $17 per ton. Carbon Oxide as a tertiary injectant in a qualified enhanced oil or natural gas recovery project, commonly referred to as Enhanced oil recovery (EOR), the applicable credit is $12.  

If a company uses direct air capture (DAC) facilities, the applicable credit is multiplied roughly 2 times per ton. Furthermore, for a company that satisfies 45Q’s prevailing wage and apprenticeship requirements, the credit amount is increased by 5 times per ton.  

What are the steps to file? 

The 45Q credit is one of the few credits that is available for the “elective payment” refundable to taxable entities.  This allows taxpayers to receive a refund regardless of the tax liability.  A company aiming to claim 45Q will need to pre-register online with the IRS to receive an identification number, which is consistent for all tax credits within Inflation Reduction Act (IRA). Once a company has received an identification number, they can claim the 45Q on the tax return.  This registration process needs to be performed every year claiming the 45Q.  

IRS CircIRS Circular 230 Required Notice‐‐IRS regulations require that we inform you that to the extent this communication contains any statement regarding federal taxes, that statement was not written or intended to be used, and it cannot be used, by any person (i) for the purpose of avoiding federal tax penalties that may be imposed on that person, or (ii) to promote, market or recommend to another party any transaction or matter addressed herein. 

In Brief

• Transferable credits are available to companies that qualify under the Inflation Reduction Act. 
• A company can sell transferable credits to multiple buyers. 
• Companies purchase transferable credits, usually at a discount, to reduce tax liabilities.  
• A transfer statement and the required documentation are necessary to sell credits. 

What Is Transferability?

Transferability is the ability to exchange (i.e. sell) credit to another eligible entity. Taxpayers can either sell all or a portion of a tax credit to an unrelated third-party transferee in exchange for cash. Here is a list of the IRA tax credits that can be transferred and sold. 

• Energy Credit (48) 
• Clean Electricity Investment Credit (48E) 
• Renewable Electricity Production Credit (45) 
• Clean Electricity Production Credit (45Y)  
• Zero-emission Nuclear Power Production Credit (45U) 
• Advanced Manufacturing Production Credit (45X) 
• Clean Hydrogen Production Credit (45V) 
• Clean Fuel Production Credit (45Z) 
• Carbon Oxide Sequestration Credit (45Q) 
• Credit for Alternative Fuel Vehicle Refueling/Recharging Property (30C) 
• Qualified Advanced Energy Project Credit (48C) 

Why Sell/Transfer? 

In the scenario that the Seller’s credit exceeds their tax liability, they are eligible and have the option to transfer a portion or the entirety of that credit amount. This allows certain entities (including tax-exempt) to generate “cash” from the qualified energy projects. 

Why Buy? 

Buyers of transferable credits can offset current tax liability with the purchased credits, and they are typically purchased at a discounted rate. It is important to note when buying credit from another taxpayer, the buyer of the credit cannot then transfer the credit. 

What is needed for “Transfer Election Statement”? 

According to 1.6418-2(b)(5)(ii), there are certain items that need to be included within the “Transfer Election Statement”. This statement must be attached to the tax return for both the buyer and seller. The transfer election statement includes the following: name, address, and taxpayer identification number for both the buyer and seller, a description of the type and amount of the eligible tax credit transferred, the timing and amount of cash paid for the eligible tax credit transferred, and the registration number related to the eligible credit property. 

In addition, the tax return will also need a statement or representation from the seller and the buyer taxpayer acknowledging the notification of recapture requirements under section 6418(g)(3) and the section 6418 regulations (if applicable). Also, a statement or representation from the seller that the seller has provided the required minimum documentation to the buyer. 

The “required minimum documentation” that the seller will provide to the buyer will be information that validates the existence of the eligible credit property, which could include evidence prepared by third parties.  Additionally, if applicable, documentation substantiating that the seller has satisfied the requirements to include any bonus credit amounts in the eligible credit that was part of the transferred credit.  This could include evidence of the seller’s qualifying costs in the case of a transfer of an eligible credit that is part of the investment credit or the amount of qualifying production activities and sales amounts, as relevant, in the case of a transfer of a production credit. 

More information available 

At CFO Services, we are assisting our clients on both sides of these transactions, because of the significance of the transaction and the ongoing responsibility of each party.  We have put together a short list of the attributes that the seller and buyer need to be aware of in a transfer of credit.  If interested, please reach out to us and we would be happy to schedule a time to discuss.   

IRS CircIRS Circular 230 Required Notice‐‐IRS regulations require that we inform you that to the extent this communication contains any statement regarding federal taxes, that statement was not written or intended to be used, and it cannot be used, by any person (i) for the purpose of avoiding federal tax penalties that may be imposed on that person, or (ii) to promote, market or recommend to another party any transaction or matter addressed herein.